A Business article last Sunday about the machine tool industry incorrectly reported that securities analyst Eli Lustgarten of Paine- Webber Inc. is on retainer with the Association for Manufacturing Technology. He is not. (Published 9/16/90)

CHICAGO -- They peddle electronic controls, grinding machines, cooling systems, manufacturing software, robot components, fan blades, turbo blades, buckets, whatever "makes the things that manufacturers need to make other things," as one visitor put it.

The machine-tool industry, which last week began its enormous annual trade show here, is considered by many a bellwether for U.S. manufacturing, with which it is so closely linked. In the last few years, the bell has been visibly cracked.

For the area within a 300-mile radius of Chicago, the sluggishness in manufacturing is of particular concern. Despite the lure of the Sun Belt, an estimated 65 percent of the nation's manufacturing occurs in this part of the Midwest.

Opinions about what the future holds are varied at the 1,542 exhibits at the International Machine Tools Show, which spreads across the equivalent of 34 football fields in the three cavernous buildings of McCormick Place on Lake Michigan.

Eli Lustgarten, a securities analyst from New York's PaineWebber Inc., said this is going to be a good year for the industry. The people with the Association for Manufacturing Technology, the Virginia-based trade association that puts on the show, say Lustgarten knows what he is talking about: They have him on retainer.

"There's a light at the end of the tunnel. We really believe that. We're now in the early stages of recovery, and I think the economic weakness that has been going on is masking some strong underlying trends," Lustgarten said.

"Before 1990, we were in trouble. Orders were down 27 percent last year. Now it looks like we're going to end 1990 with orders up 4 to 6 percent and next year, 5 to 10 percent."

Lustgarten, however, never met Jack Weise. Weise, vice president for advanced engineering at Snyder General Corp. in Red Bud, Ill., used one word to characterize the U.S. machine-tool industry: "Sick."

Weise said, "Most American manufacturers, at least of major metal-cutting machines, are no more."

Lustgarten said the catalyst for an improved machine-tool industry is the health of its biggest customer, the automotive industry. "The auto industry has already overcome the major stumbling blocks it has recently faced," he said. He listed those obstacles: "Uncertain pollution regulations, uncertain fuel economy rules, the market turndown, the recognition that they had the wrong products on the boards, a new {United Auto Workers union} contract, the retirement of the chairmen of Ford {Motor Co.} and {General Motors Corp.}, the uncertainty at Chrysler {Corp.}."

A week earlier, in a report to the association, he wrote, "American industry has embarked upon a catch-up program to match and, in many instances, to exceed, the productivity and cost control of offshore competitors."

Mike Martin, an engineer at Snyder, which makes heating and cooling equipment, said foreign competitors have already won the race. "From the articles I've read, they're beating us in everything: quality, cost, automation and sophistication."

Michael Gyorkos, a computer design and manufacturing specialist at Sunstrand Corp. in Rockford, Ill., said simply, "I'm here and I'm buying. But most of the people here are buying from the Japanese."

Indeed they are, according to the National Center for Manufacturing Sciences in Ann Arbor, Mich., a consortium group that provides research and development services for its members. The Japanese are often exhibiting equipment superior to American products on display, the consortium said, but the Japanese aren't even offering up their best.

"What you're seeing is excellent Japanese equipment, but there is Japanese equipment in Japan that is better than this, more refined than this and doing better than this," said Robert Price, the consortium's vice president for membership. "What they're selling to Toyota, you're not seeing on the floor today."

The biggest reason for the technology gap is that Japanese industry spends an average of 8 percent on research and development, Price said, and "we are under 1 percent."

"Even the big guys spend no more than 3 percent. That's all they've got."

Ted Olson, the consortium's vice president for technology, said that in 1988 the United States produced the fifth-largest share of the world's machine tools, 6 percent of the total.

Japan dominated with a 23 percent share that translated into $9 billion in sales. West Germany was second with 18 percent, followed by the Soviet Union with 12 percent and Italy with 7 percent. Three other nations -- Switzerland, East Germany and the United Kingdom -- recorded sales of more than $1 billion.

Olson said Americans could follow one Japanese example, if antitrust law allowed them to. "What {the Japanese} do is, they get together with the users of machine tools and create a leveling of demand, so they dampen the swing. They orchestrate demand over time, within industries and across industries, so autos might capitalize, followed by a capitalization in shipbuilding, followed by a capitalization in consumer electronics," he said.

David Brophy, director of the Growth Capital Symposium at the University of Michigan in Ann Arbor, said the U.S. survivors will be the ones who learn to work with offshore competitors, or "transplants."

"Our companies are learning to deal with transplants and this is the wave of the future," he said. "I think that's good for the Midwest and it augurs well for companies in that mode." Brophy said smart U.S. companies would find their own market niches, then get together with transplants in some form of strategic alliance.

He urged caution, however. "I suspect we'll back into that and then define it later," he said. " 'Strategic alliances' might not be too popular right now, you know, 'You and I get together and you eat my lunch.' We have 480,000 examples of that happening with the Japanese."

Hans Ruwwe, Washington correspondent for Foreign Trade News in Cologne, Germany, said finding such niches might not be easy for Americans. "In Germany, the machine-tools industry is high-tech and tends to be specialized. The Japanese concentrate on the big, universal machines and in that respect they are much closer to the U.S.," he said.

"I'm pessimistic about the quality that Americans have to offer. I've attended many trade shows -- machine tools, woodworking and chemical -- and I am doubtful. There is still a big difference in quality."

Americans are not likely to improve their situation until they can bring down costs and find additional capital, according to David Allardice, assistant director of research at the Federal Reserve Bank of Chicago.

"Despite what the current research and literature has been presenting, we are not evolving as a nation of hamburger stands or a service economy or any of those easing-out answers," he said. "We must remain viable and innovative in our manufacturing."

One problem: "Corporate America places more value on the near term both from the tax and the profit side. If we're talking strictly from balance sheets and profit-and-loss statements, it doesn't do any good to talk about the long run."

Nevertheless, Allardice said, "We're doing relatively well with large enterprises. The GMs, the Caterpillars -- the construction machinery manufacturers are all moving ahead."

But most of the 320 members of the Association for Manufacturing Technology, the machine-tool people, are small, according to association Vice President Charles Pollock. Their average annual sales are under $7 million, and most employ fewer than 60 people. "They have capital problems, they don't have any clout at the banks," he said.

The association does predict moderate growth for its small-but-significant industry.

"We're encouraged by the investments being made by American industry to modernize and be globally competitive. If we don't do it, we're not going to survive. Especially in the Midwest, where our wealth comes from mining, manufacturing and growing things," Pollock said. "There's no such thing as a post-industrial society, not unless it's a declining society."